Commentary
Trends in Savings,Investment and Consumption
This article reviews the quick estimates of savings, investment and consumption released by the Central Statistical Organisation in the National Accounts Statistics 2007. It is clear that both savings and investment have risen sharply in the past two years, but there remain some concerns about the trends.
PULAPRE BALAKRISHNAN, MSURESH BABU
F
I Aggregate Picture
For the year 2005-06, both savings and investment display a certain vigour, part of a pattern discernible from the year 200203 onwards. This is apparent from Tables 1 and 2 both of which present, for reasons of comparability, these variables as a share of current GDP at market prices. Note that savings and investment in India are now inching towards east Asian levels as part of a general strengthening of the macroeconomic environment of the economy. Savings appear to have definitely broken out of the figure of 23 per cent of GDP around which it has fluctuated1 mildly throughout the 1990s. As for investment, for the year 2005-06 gross domestic capital formation is an impressive 32.2 per cent of GDP. With this, we are now back in the situation more typical of India whereby investment exceeds savings, unlike the very early years of this century when savings exceeded investment implying that India was exporting capital. The one departure from this comforting picture is the rising inflation rate currently witnessed, described by some as the “overheating” of the economy. If we are to characterise the current situation overall, we would say that it represents an investment boom.
On the estimates themselves, we make two comments. First, the aggregate figure for domestic capital formation includes “valuables”. These are defined as “gold, ornaments and other metals”. In the last two years, this item amounts to over 1 per cent of GDP, close to the figure for the current account deficit in some years. As much of the gold is imported, this gives us an idea of the contents of the very same deficit. Clearly, little has changed from the time in the first half of the 20th century when Keynes had described India as a “veritable sink for gold”. Also, the World Gold Council’s concerted appearance in India of late appears to have paid off! Secondly, “errors and omissions”, the factor that is used to reconcile investment with the finances available for capital formation – being savings plus the current account balance – continues2 to be large. As Shetty (2005) has highlighted this, and the issue has subsequently been taken up by Chaudhuri (2005), we do not dwell on it further. We only stress one point that not only does its continued presence constitute a source of dissatisfaction regarding the estimate for gross investment but also the figure (for errors and omissions) has been particularly large3 over the past two years, being close to 2 per cent of GDP in 2004
05. Nevertheless, we have little doubt that the CSO estimate of investment is faithful to both the direction and broad magnitude of capital formation in the economy today. We are, no doubt, witnessing an investment boom in India. We return to this issue below.
II Disaggregated View
Data on savings by institutions are also presented in Table 1. The seven-year period for which data are presented has seen some significant changes. One among these is the steady decline in the share of savings contributed by the household sector. This is closely matched by the rising share of the private sector, which can be seen emerging as a major saver in the economy. But the more interesting development is the re-emergence of positive saving in the public sector. By now, three years old, this trend has been strongly maintained. Though the figures by themselves are not very large, the emergence of positive savings in the public sector is an important development, taking us qualitatively nearer to the east Asian experience where governments have been serious contributors to the growth process by channelling resources into investment. We digress very briefly to emphasise this point, and to draw out its implications for India.
Table 3 presents data on savings and investment in (South) Korea. While savings and investment in India are by now
Table 1: Savings (as Percentage of GDP)
Item/Year 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06
| Household | 21.13 | 21.03 | 21.79 | 22.74 | 23.77 | 21.58 | 22.35 |
|---|---|---|---|---|---|---|---|
| (85.19) | (89.85) | (92.79) | (86.15) | (80.11) | (69.35) | (68.91) | |
| Pvt corporate sector | 4.47 | 4.29 | 3.74 | 4.23 | 4.75 | 7.15 | 8.09 |
| (18.01) | (18.32) | (15.91) | (16.02) | (16.01) | (22.97) | (24.93) | |
| Public Sector | -0.79 | -1.91 | -2.04 | -0.57 | 1.15 | 2.39 | 2.00 |
| (-3.20) | (-8.17) | (-8.70) | (-2.17) | (3.88) | (7.68) | (6.16) | |
| Total | 24.81 | 23.41 | 23.48 | 26.40 | 29.67 | 31.12 | 32.43 |
| Note: Figure in parentheses indicates percentage of total. | |||||||
| Source: NAS 2007, CSO. |
Economic and Political Weekly May 5, 2007 clearly in this league, one feature distin-to determine where (in terms of sectors of formation in India in recent years, and the guishes the Korean position from the Indian the economy) it is going to, the rise in most striking aspect of the CSO’s estione. Public savings in Korea has been public investment is, in our view, desirable mates that we are currently studying. This consistently high and close to a third of given the low levels of public investment has to do with the rise of capital formation total savings in the economy. Also, the in India compared to, say, the economies in the private corporate sector. Notice, figures for the past seven years reflect a of western Europe. We now come to the from Table 2 again, that investment in this hallmark of long-term development in most dramatic part of the story of capital sector has risen by close to 100 per cent Korea, that savings has mostly exceeded investment, implying that its economy has
Table 2: Investment (Gross Capital Formation as Percentage of GDP)
not depended on foreign savings. This is
Item/Year 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06
useful to bear in mind at a time when there
is an evident obsession among some with Public sector 7.41 6.88 6.86 6.07 6.31 7.05 7.41
(28.38) ( 8.57) (28.80) (24.29) (23.77) (23.77) (23.05)
replicating the Korean experience (mistak-
Pvt corp sector 7.35 5.70 5.41 5.92 6.92 9.92 12.89
enly, foreign direct investment in this
(28.16) (23.69) (22.69) (23.68) (26.05) (33.42) (40.07)context) in India. Household sector 10.55 10.79 10.94 12.44 12.44 11.39 10.67
Back to the issue of the improvement (40.41) (44.83) (45.90) (49.75) (46.84) (38.38) (33.18) Valuables 0.80 0.70 0.62 0.57 0.89 1.31 1.19
in public savings in India in recent years,
(3.05) (2.91) (2.61) (2.27) (3.35) (4.43) (3.70)it can be verified that this follows directly Total 26.10 24.08 23.83 25.01 26.56 29.67 32.16 from the reduction in the revenue deficit
Note: Figure in parentheses indicates percentage of total.
following the enactment of the Fiscal
Source: NAS 2007, CSO.
Responsibility and Budget Management Act in 2002-03. While the aggregated data Table 3: Savings and Investment in Korea (as Percentage of GDP) here cannot be put to work to establish how
Item/Year 2000 2001 2002 2003 2004 2005 2006
the improvement has been brought about,
Gross saving 33.7 31.7 31.3 32.8 34.9 32.9 31.4
even a cursory glance at the central
Gross saving: pvt individuals 10.6 8 4.7 6.2 7.5 6.3 5.9
government’s budget documents showed
Gross saving: pvt corporations 11.2 12.7 14.8 15 17.2 16.4 15.1 us that it has been engineered via a reduc-Gross saving: government 11.8 11 11.7 11.6 10.2 10.1 10.4 tion in spending. Though some spending Gross domestic investment ratio 31.1 29.4 29.1 30.1 30.4 30.2 29.9
certainly needs to be cut, we believe that Source: Korean statistical information system; http://kosis.nso.gr.kr, source cited is Bank of Korea.it is equally important to raise revenues via
Table 4: Gross Domestic Capital Formation (Rs Crore at Constant, 1999-2000, Prices)
both taxation and an improved performance of the public enterprises. This is entirely Industry/Year 2001-02 2002-03 2003-04 2004-05 2005-06 feasible. So used are we to public dissaving
Agriculture, forestry and fishing 55,806 55,668 53,840 57,253 64,131by now that we tend to forget that in the Mining and quarrying 8,366 8,383 13,990 13,348 15,2301960s public savings contributed close to Manufacturing 103,683 157,018 196,008 290,137 373,616 25 per cent of aggregate savings in the Electricity, gas and water 42,266 39,237 47,787 45,917 47,629
Construction 15,352 16,705 18,496 16,172 16,869
economy [Bagchi and Nayak 1989, Table
Trade, hotels and restaurants 22,967 5,413 19,295 20,302 22,0923]. In our view, while there is much scope Transport and communication 58,838 72,609 70,383 80,357 78,676 for trimming the range of public interven-Financing and insurance 103,516 101,882 101,587 80,363 90,442
Community services 70,831 78,710 81,754 100,335 128,026
tion, such as reorienting it to certain seg-
Gross capital formation 481,625 535,625 603,140 704,184 836,711
ments of the economy, the role of the
Valuables 13,489 12,930 21,541 33,873 33,992
government in contributing to capital
Source: NAS 2007, CSO.
formation remains as significant as ever. We believe, therefore, that a continuing
Table 5: Consumption
improvement in public-sector saving is desirable, even though the precise mecha-Item/Year 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06
nism of bringing this about may be de-Distribution of final consumption bated. expenditure Food, beverage and tobacco 51.5 47 46.3 43.3 42.1 39.6 39.4
Data on capital formation are presented
Food 45.3 41.3 41.1 37.6 36.7 34.2 33.5
in Table 2. As with savings, the household
Clothing and footwear 5.3 5.9 5.2 5.2 5 5.3 5 sector has been somewhat sluggish of late. Gross rent, fuel and power 11.4 12.5 12.6 12.8 12.5 12.2 11.8 This finding should not surprise as house-Furniture, furnishings, appliances and services 3.3 3.4 3.4 3.4 3.3 3.5 3.6
hold investment is at least partly estimated
Medical care and health services 4.4 4.8 5.2 5.7 5.9 6.3 6.5via the saving in physical assets. As a Transport and communication 13.1 14.4 14.5 15.8 16.9 18.4 19.1 percentage of GDP, it peaked in 2002-03 Recreation, education and
cultural services 3.4 3.7 3.7 3.7 3.8 4.1 4.2
but has declined since 2003-04. On the
Miscellaneous goods and services 7.8 8.4 9.1 10.1 10.4 10.6 10.3
other hand, the public sector has shown
Total 100 100 100 100 100 100 100a steady increase in capital formation over Growth of consumptionthe past three years, though by 2005-06 it Private final consumption 7.1 8.9 5.4 10.9 9.4 10.6 Government final consumption 5 6.3 3.3 6.6 10.3 18.1
had only regained the level of 1999-2000. While the data at hand here cannot be used Source: NAS 2007, CSO.
Economic and Political Weekly May 5, 2007
over the last two years. Though stocks have indeed risen at the same time, it may be verified4 that the greater part of increased capital formation has been in fixed equipment. This may be seen as micro level evidence for the investment boom conveyed by the aggregate data in Table 2. Further reliability of this estimate is signalled by two additional pieces of evidence. First, we find5 that output of the capital goods sector has grown by close to 16 per cent in the year 2005-06 and by not much less in the previous year. Secondly, there is a 62 per cent growth6 of imports of capital goods in 2005-06. This is a very large increase indeed. As an aside, perhaps inevitably, some part of the current investment boom is spilling over into the rest of the world via the balance of payments.
While the data may indicate an investment boom, it is yet of interest to ascertain in which sector of the economy the capital formation is taking place. This it is possible to do with the aid of the data presented in Table 4. It is undoubtedly the case that the largest magnitude of capital formation is occurring in the manufacturing sector, though the percentage increase in “community, social and political services” is large. In agriculture, after a lacklustre performance for two or three years, capital formation has picked up in 2005
06. Nevertheless, the data in the table allows us to see this in perspective. Capital formation in the group “agriculture, forestry and fishing” is less than that in “transport and communications” and “financing and insurance”. For a sector so important, both intrinsically and in terms of its linkages to the rest of the economy, this represents a gross inadequacy. Though the slow growth of agriculture is the result of a whole host of factors, we can see that capital formation must form a part of the story. However, the main message from this round of national income estimates is that the manufacturing sector is the main site of capital formation. The reliability of this estimate is heightened by the fact of the fast growth of the capital goods sector already referred to and of manufacturing output as a whole. In a departure from the pattern for the last five years, industry is growing faster7 than most components of services and almost as fast as its fastest growing ones. So the investment boom that we had spoken of is actually a manufacturing boom. Whether this is being translated into faster growth of employment we cannot, of course, determine from the national income estimates which we have to go by here alone.
III Consumption
It is customary among commentators on lately arrived estimates of national income and its components to focus excessively on the figures for savings and investment, without much concern for the associated consumption figures, even as the latter are a standard product of national income accounting. To redress the balance due to this practice a bit we study the trend in consumption reported in National Accounts Statistics 2007. There is a long-standing tradition in economics that recognises that economic growth need not reflect the trend in economic welfare. This tradition views consumption as central, and suggests that often even a recorded productivity increase could be going entirely to maintain the capital stock, with nothing left over for increased consumption. The data in National Accounts Statistics 2007 may be used to shed light on trends in India in recent years. We report two developments. First, while consumption is growing in real terms, in relative terms private consumption is losing out to government consumption in recent years. The data is presented in the lower panel of Table 5. This trend needs to be scrutinised. For instance, what are these elements of government consumption and are they desirable? The other trend in consumption that emerges from Table 5 is the declining share of food in the consumption basket. Note that the decline is approximately 25 per cent in the past five years, surely a large figure. Whether this is the standard operation of the Engel effect or whether the consumption of food, already at less than adequate levels for the average household, is being crowded out by other expenditure such as on transportation and medical care – essential for earning an income or maintaining one’s physical capacity for work intact
– remains to be investigated. We want to stress that any observed macroeconomic exuberance is entirely autonomous of considerations of welfare, and does not make redundant a purposive study of the latter. Indeed, we believe that policy focus in the last decade or so has at times privileged a concern for the macroeconomic environment to the neglect of considerations of welfare.
IV Conclusion
The data on savings and investment presented in National Accounts Statistics 2007 recently released by the CSO depict a macroeconomic resurgence marred only by a rising inflation rate. The figures suggest, in particular, a private investment boom that has lasted for two years now. The investment figures are not implausible for there is sufficient evidence of the same
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Economic and Political Weekly May 5, 2007 from elsewhere in the economy, such as the rapid expansion of capital goods production and the searing rise in capital goods imports documented by us. Further, the data allow us to trace the investment boom to the manufacturing sector, accentuating our confidence in the estimates as the sector is currently the fastest one. But the estimates are weakened somewhat by an unacceptably large figure for “errors and omissions” in recent years. This is somewhat unsatisfactory. As regular users of its indispensable product, we hope that the CSO will attend to this matter with alacrity.
EPWEmail: pbkrishnan@yahoo.com sbab77@hotmail.com
Notes
1 See Economic Survey 2006-07, p S-8. 2 See Economic Survey 2006-07, p S-9.
3 See Economic Survey 2006-07, p S-9.
4 See Statement 7.1, CSO (2007).
5 Economic Survey 2006-07, Table 7.2: Growth rates of industrial production by use-based classification.
6 Economic Survey 2006-07, Table 6.9: Imports of principal commodities.
7 See Economic Survey 2006-07, Appendix Table 1.6: Annual growth rates of real GDP at factor cost by industry of origin.
References
Bagchi, A and P Nayak (1989): ‘Public Finance and the Planning Process’ in A Bagchi and N Stern (eds), Tax Policy and Planning in Developing Countries, Oxford University Press, Delhi.
Chaudhuri, S (2005): ‘A Note on Savings and Investment’, Money and Finance, January-June, pp 65-82.
CSO (2007): National Accounts Statistics 2007, Central Statistical Organisation, New Delhi.
Shetty, S L (2005): ‘Savings and Investment Estimates: Time to Take a Fresh Look’, Economic and Political Weekly, February 12, pp 606-10.
Economic and Political Weekly May 5, 2007
